How to prevent sales losses due to overly strict rules in e-commerce

Sales losses are always an important factor in e-commerce. However, the issue of online fraud fraud and the resulting difficulties and losses are not the only problem here: because an overly restrictive risk management and the risk rules connected to it can create considerable losses and put many customers off – because they’re wrongly classified as fraudsters.

Companies therefore face the enormous difficulty of striking the right balance between not putting their own turnover at risk and nonetheless effectively keeping fraudsters away.

Let’s examine this problem more closely. 

The risk rules in e-commerce: fine-tuning is the decisive factor

At first sight, it is of course tremendously important for companies to ban fraudsters from one’s own online shop and to give them no opportunity for fraud. However, for this to work and for the vast majority of fraud attempts to actually be prevented, the company’s risk rules have to be designed so strictly that this can lead to other problems.

Thus, precise fine-tuning plays a decisive role in risk management. Only those who carry out an exact assessment of the risks and find the right approach will benefit from minimised sales losses in the long run. Let’s just take a closer look at both extremes of designing the rules, in order to be able to assess the effects in detail.

Overly lax rules – overly high fraud rates

If the risk solution installed by your company is configured in too lax a way, the result will be a markedly higher incidence of fraud crimes. This usually makes itself felt through a dramatically increase in the number of chargebacks and a large number of unpaid-for goods.

This effect is intensified still further as these overly lax risk rules are also known to the fraudsters, allowing them to absolutely loot your e-commerce business. This results in continual losses, which make themselves felt in (among other things) the assessment of your company by payment service providers, who will now place your online shop in a higher risk category, due to which more customers are basically turned down by the banks. It can take several months to get out of that less favourable risk category again.

So, if the risk rules are designed and implemented too weakly, you will have huge sales losses and a considerable loss of reputation to fear.

Overly strict rules: putting good customers off

However, overly strict risk rules are not a cure-all remedy either. Although it’s true that the measurable sales losses due to fraud are markedly reduced through these measures, you have other problems to contend with. Thus, you can now for example only offer your customers very few, limited payment options and must subject each customer to a comprehensive, exceptionally thorough check before the order.

As a result, not only are many good customers refused trade, but also other customers are put off from buying.  Thus, sales losses which you as an entrepreneur are often hard put to counterbalance will arise in another area of your e-commerce business.

If, in particular, the result is that long-standing customers are no longer able to make payments or are only able to pay using one specific payment method, the customer lifetime value of your customers will be dramatically reduced.

This situation should be avoided at all costs, as the painstakingly accumulated customer base is one of an online shop’s most valuable assets. Overly strict risk rules are therefore a problem too, and can cause sales losses and even increase them.

Striking the right balance with your risk rules

Basically, it isn’t really possible to reduce fraud in e-commerce to zero. This would only be possible if your own sales figures lay at zero too – because as long as the opportunity to do so exists, there will always be potential customers who harm your e-commerce business through fraud. What you can do, however, is to minimise the sales losses.

To do this, there are risk rules, based on which your risk solution functions. Here, fine-tuning, and thus experience, play a particularly important role in their implementation. The rules must be defined in such a way as to keep the number of fraud opportunities as low as possible, without thereby subjecting your customers to major or noticeable limitations in the purchasing process.

The risk rules must be just restrictive enough to filter out the majority of fraudsters in your e-commerce business and to thwart them without actively putting your customers off. Experience shows that the appropriate designing and fine-tuning of risk rules alone not only minimises sales losses, but simultaneously reduces chargeback rates, without a fall in conversion rates. Quite the contrary, these even often increase, as the optimised rules make your e-commerce business more interesting and attractive for customers, without throwing open the doors to the fraudsters.

Why experience in e-commerce is particularly important

This is, however, a difficult undertaking for many companies. At worst, it takes a very long time to adapt the risk rules little by little and to precisely evaluate the new values. During this time, either the door will be wide open to fraud or customers will be put off.

Many companies in e-commerce therefore rely on proven specialists like anlyx – who, thanks to their experience, are able to optimise the risk rules in a markedly easier and more efficient way. For, as good the different automated risk solutions may be, without targeted fine-tuning by experts many of the results unfortunately still leave much to be desired.

The risk rules must be appropriately adjusted to the company, to its target group and to its experiences with e-commerce fraud in the sector up to now. This is the only way to define rules that optimally fulfil the above requirements.

Summary: Avoiding sales losses and nonetheless deterring fraudsters

In sum, it can be said that the risk rules of the risk solution used must be adjusted in such a way as to effectively deter most fraudsters and nonetheless enable normal customers to carry out a simple e-commerce purchase. Thus, the conversion rate increases without having to reckon with a higher number of chargebacks or other consequences of fraud.